Or, if the contra liability account balance is immaterial, the accounting staff could elect not to keep a balance in the account at all. When the amount is material, the line item is typically presented separately on the balance sheet, below the liability account with which it is paired. The debit balances in the above accounts are amortized or allocated to an expense, such as Interest Expense over the life of the bonds or notes payable. The amount in the accumulated depreciation account is deducted from the assets of a company, such as buildings, vehicles and equipment. This can help anyone viewing the financial information to find the historical cost of the asset. The accumulated depreciation amount shows how much depreciation expense has been charged against an asset.

• The key example of a contra equity account is Treasury stock, which represents the amount paid to buyback stock.
• In the above example, the debit to the contra liability account of $100 lets the company recognize that the bond was sold at a discount.
• When a contra asset account is first recorded in a journal entry, the offset is to an expense.
• As a small business owner, understanding how to set up contra accounts enables you to prepare and maintain accurate financial records.
• However, it’s important to keep in mind that you can create any contra account you want to more clearly describe your business — this is not an exhaustive or definitive list.
• As a business owner, you’ll record these returns as contra revenue because they reduce the initial sales amount reported.
• If a company offers an early payment discount (such as 1% or 2% of the invoice amount if it is paid within 10 days instead of the required 30 days) the amount of the discount is recorded in the contra revenue account Sales Discounts.

Types of contra accounts

If accounts receivable is $40,000 and allowance for doubtful accounts is $4,000, the net book value reported on the balance sheet will be $36,000. To illustrate the contra revenue account Sales Returns and Allowances, let’s assume that Company K sells $100,000 of merchandise on credit. It will debit Accounts Receivable for $100,000 and will credit Sales for $100,000. If a customer returns $500 of this merchandise, Company K will debit Sales Returns and Allowances for $500 and will credit Accounts Receivable for $500. Company K’s income statement will report the gross Sales of $100,000 minus the sales returns and allowances of $500 and the resulting net sales of $99,500. The most common contra type, contra assets, records the loss in value of any asset accounts listed in your general ledger.

• Contra assets give investors a better picture of how you use your assets over time.
• The contra revenue account reflects the original amount, the discounted sale, and the resulting net sales for the company.
• The amount is not reported, and the net sales amount is reported on the income statement.
• Speaking of which, make sure you keep an eye on your competitors and industry best practices.
• By reporting contra accounts on the balance sheet, users can learn even more information about the company than if the equipment was just reported at its net amount.

Types of Contra Accounts – Explanation

A contra account is a general ledger account with a balance that is the opposite of another, related account that it is paired with. The B/S impact is where the contra liability comes into play, i.e. the historical value of the debt is not impacted by the OID. Emilie is a Certified Accountant and Banker with Master’s in Business and 15 years of experience in finance and accounting from corporates, financial services firms – and fast growing start-ups.

Understanding Contra Revenue

• Contra accounts are usually linked to specific accounts on the balance sheet and are reported as subtractions from these accounts.
• A contra asset account is an asset account where the account balance is a credit balance.
• Simply hit Control + N under the Chart of Accounts or Edit, then click New (to create a new account).
• When accounting for assets, the difference between the asset’s account balance and the contra account balance is referred to as the book value.
• And by comparing these contras against their corresponding parent accounts, you can better understand the actual value of the assets retained by your business.
• For example, if a piece of heavy machinery is purchased for $10,000, that $10,000 figure is maintained on the general ledger even as the asset’s depreciation is recorded separately.

Schedule regular reviews of your allowance and discount policies so they remain competitive and relevant to your market conditions. This might mean adjusting your strategies based on seasonal trends, customer feedback, or new market entrants. They happen when you reduce the selling price of an item, typically due to minor defects or because a customer negotiated a lower price after the sale. Rather than pay this cost up-front and tie up a significant chunk of capital, Show-Fleur makes this purchase on credit with a 90-day due date after invoicing. Fortunately, the seat vendor offered an early payment discount of 5%, meaning that when Show-Fleur paid off its full credit note within the first 30 days, it recouped $30 thousand in savings. Shaun Conrad is a Certified Public Accountant and CPA exam expert with a passion for teaching.

• But these items don’t retain that initial value; if liquidated, they would likely be sold at a loss.
• If you offer a 5% discount on a $100 item for early payment, you’ll record sales of $95.
• The following are examples of commonly-used contra asset accounts you could create to better understand your business financials.
• Discount on Bonds Payable is a contra liability account with a debit balance that reduces the normal credit balance of its parent Bonds Payable liability account in order to present the net value of payables on a company’s balance sheet.
• The discount on bonds payable amount shows the difference between the amount of cash received when issuing a bond and the value of the bond at maturity.

Contra asset accounts include allowance for doubtful accounts and the accumulated depreciation. Contra equity is a general ledger account with a debit balance that reduces the normal credit balance of a standard equity account to present the net value of equity in a company’s financial statements. Given that liabilities have a credit balance, ensure that all your contra liabilities accounts have debit balances. Discount on notes payable and discount on bonds are examples of contra liability accounts. Obsolete, Unsold and Unusable Inventory are contra asset accounts with a credit balance that reduce the normal debit balance of the main Inventory asset account in order to present the net value of inventory on a company’s balance sheet.

AccountingTools

Still, it is important when possible to consider how the net accounts are calculated and be wary of companies that are reporting a ton of bad debts. The contra equity account treasury stock is reported right on the balance sheet. Home Depot has repurchased more than $72 billion of stock to date, with around $7 billion coming during this accounting contra revenue account period. These deductions, which come in the form of sales returns, allowances, and discounts, are not expenses but adjustments that lower the total sales on your income statement. By reporting contra accounts on the balance sheet, users can learn even more information about the company than if the equipment was just reported at its net amount.

Example of a Contra Account

Consequently the net balance of the two accounts shows the net value of the sales after discounts. If there’s an increase to allowance for uncollectible accounts, you record the same amount in the bad debt expense of your income statement. Similarly, accumulated depreciation accounts reduce the value of the fixed assets you report on your financial statements. The most common contra account is the accumulated depreciation account, which offsets the fixed asset account. Taken together, the asset account and contra asset account reveal the net amount of fixed assets still remaining.